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Wednesday, 22 November 2017

HL Global Enterprises (AVX.SI) - Potential exit from SGX-ST Watchlist

A few interesting facts from the completion of the complex disposal of HL Global Enterprises' (AVX.SI) share capital of LKN Investment International Pte Ltd (LKNII), which consists of 100% interest in Hutai that owns the 106-unit serviced apartment building Elite Residences located near Shanghai's central district as well as the 60% interest in loss-making CHQ that consists of the 455-unit Copthorne Hotel in Qingdao, located near Qingdao's central business district. More information can be gleaned here:

Elite Residences in Shanghai, the PRC

1. The company will receive net proceeds in excess of S$100M from both deals, the bulk of it already received.2. HL Global will become a net cash company VS a net debt company before the disposal.3. HL Global should report positive book value VS a negative book value previously.4. The now positive book value should also be very much more than the current market cap (I estimate it to be around S$72M or S$0.75/share vs market cap of about S$44M or S$0.455/share).5. The company will report a significant gain in earnings this year due to this disposal.6. Main investments and properties of the group after completion still consists of:
a. 100% interest in Augustland Hotel Sdn Bhd which owns and operates the profitable Copthorne Hotel Cameron Highlands;
b. 49% interest in a management services company to Equatorial Hotel Shanghai;
c.100% interest in Victory Heights which owns a land located in Tengah Malaysia and finally;
d. 2 other pieces of land of approximately 8,400 sqm in Cameron Highlands, Malaysia.

As guided by management in earlier reports, I believe HL Global will use part of the huge cash proceeds for the repayment of the unsecured loan which has been one of the main causes of its losses the past few years via interest expense. Coupled with loss-making CHQ already out of the picture, HL Global should be able to report reasonable earnings going forward, fulfill the financial exit criteria and be removed from the SGX-ST Watchlist that is probably causing disinterest in the shares of this company. The company has also been reporting positive free cash flows.

Lastly, the substantial cash that remains even after paying the unsecured loan in full may be used to fund suitable acquisitions of new businesses and possibly, the payment of a dividend.

Management has been trying various ways to get HL Global out of the SGX-ST watchlist for some time now and I think this is one of the more favorable (if not most favorable) outcomes that potentially will lead to the exit of SGX watchlist.

If I'm not wrong, the S$70.08M represents the net proceeds of Hutai Consideration. The Net CHQ 60% disposal proceeds of S$40M (which is already received) is not included in this S$70M amount. So adding up, it should be about S$110M.

The latest balance sheet shows cash of S$24.6M which includes S$4M of deposit received earlier. So barring unforeseen circumstances, we should expect total net cash of about S$55M-$60M vs current market cap of S$45M. On top of these, the company still have multiple investments and properties as discussed in point 6 of this post.

Agree that the thesis still stands. Your calculation is correct. I guess the only upside here would be for the board to seek a good business to inject with the 60m. But MINIMALLY it should trade at 75c. nothing better than cash and a few small cash flow positive properties.

Latest results for HL Global Enterprises are out. Looks like i'm slightly conservative with my book value estimation. Its about 84c base on the latest results. The company also declared a 3c dividend (probably the first time in more than 10 years). I have written a new post about it and feel free to leave your comments, if any. Thank you!

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